Economist, Telegraph Columnist, Broadcaster

At last, question time for the money-printers

“Quantitative easing” and “ring fencing”. When it comes to the Western world’s response to the sub-prime crisis, these two policies quickly established themselves, and remain as, the conventional wisdom.

Along with “talking tough on austerity, but not really implementing it”, QE and ring fencing form the triumvirate of post-credit-crunch measures – or, more accurately, half-measures – favored in the UK and, more or less, in the US and Eurozone too. The trouble is that both QE and ring-fencing are a disaster waiting to happen.

For several years, this column has argued that QE, while perhaps necessary to a limited extent in the aftermath of the 2008 Lehman Brothers collapse, has been used to far too great an extent. Hundreds of billions of pounds, dollars and euros of virtually printed money later, QE has long been deeply counter-productive.

I’ve heavily criticized ring-fencing too. It is, after all, no substitute for root-and-branch sector restructuring and conclusively preventing traders from gambling with taxpayer backed deposits. Until the zombified mega-banks are put out of their misery, the UK will grow only at an extremely sluggish pace, if at all. And without a “Glass-Steagall” style separation of commercial and investment banking, we’re doing nothing but lining ourselves up for another disastrous collapse.

Until recently, while my views were far from unique, they were beyond the political mainstream. Although I’d receive “private” emails from eminent economists, city strategists and policymakers claiming they agreed with me, almost none accepted my invitation to say the same thing in print.

Recently, though, I’ve seen signs, at least, that the conventional wisdom is starting to crack, not only on QE, but ring-fencing too. This strikes me as good news. Three years late, yes, but good news nonetheless.

QE is, and always was, a tawdry way of recapitalizing bombed-out banks by the backdoor, while boosting equity markets, so said banks can try to avoid the painful but necessary step of writing down the losses on their catastrophic investments and the forced restructurings – and even criminal convictions – that could result.

QE has also facilitated circular financing, with the state borrowing from the state, so allowing policy-makers, for now, to dodge the really big fiscal decisions. It is this powerful concoction of vested interests – governments and the banking sector – that has shaped the West’s QE conventional wisdom. History, to say nothing of common sense, has been willfully ignored.

There was yet more grim economic data at the end of last week, with manufacturing down 0.3pc in November, and the respected National Institute announcing that GDP may have contracted over the last three months of 2012 – sparking fears the UK could enter a “triple dip” recession. So there is growing speculation the Bank of England’s monetary policy committee will soon be aunch another funny money missile, implementing a further round of QE. No matter that our central bank has already created £375bn of virtual credits ex nihilo in just a few years, expanding its balance sheet by over 350pc, far more than its US and Eurozone counterparts.

More QE isn’t the answer to our problems. Initially a post-Lehman cushion, it then became a comfort blanket and has since been transformed into the financial equivalent of crack cocaine. The governments and asset markets of many of the world’s leading economies are addicted to “extraordinary measures”, with ministers and central bankers not even wanting to think about how we can get ourselves off it.

There are indications, though, that the economics profession is coming to its senses and the pro-QE consensus is starting to shift. Last Thursday, I was part of a roundtable discussion on QE at the Centre for Policy Studies in Central London. With Andrew Sentence in attendance, the courageous former MPC member who’s been almost alone among the UK’s economist heavyweights in raising the alarm on QE, it was always going to be an event worth attending. It was heartening to see, though, that other top dismal scientists are now voicing serious concerns about the dangers of more monetary stimulus.

QE “proceeds” have found their way into non-financial markets, so raising oil prices, some argued. By pushing up food prices, others said, QE caused the Arab Spring. If we reach for QE again, we were told, then the markets could be spooked, and equity markets could fall sharply. And when I argued that QE was just a ruse to debase Western currencies, and was causing genuine anger among the governments of large emerging markets that have leant us money, several fellow discussants were literally nodding from the waist in agreement.

So let’s see what happens. Until now, the Treasury has had a free run on QE, being able pretty much to order the Bank of England to keep its virtual printing presses running. Now that opinion is starting to shift, with more economists and market participants worrying aloud, hopefully the Bank will feel more emboldened to say enough is enough.

On banking reform, too, it strikes me that the conventional wisdom could soon be subject to some very serious scrutiny. In September 2011, the Vickers Commission recommended that risky investment banking and everyday commercial banking could continue to be conducted by the same institution, as long as the activities were “ring-fenced”. Chancellor George Osborne describes this as the “settled” view and has discouraged various other bodies – including a Parliamentary committee – from examining the concerns of those of us who’ve argued that history shows Chinese walls don’t work and ring-fences soon turn into string vests. So the government is now legislating to implement the ring-fence. Succumbing even further to the banking lobby’s demands, ministers have watered-down the Vickers measures even more and, quite incredibly, made sure they won’t kick-in until 2019.

While most UK politicians seem comatose when it comes to this most crucial of issues (there are honorable exceptions), dissent is visibly stirring in the United States. Last week, a new bill was introduced in Congress to re-instate the Depression-era Glass-Steagall divide, jointly sponsored by a high-profile Democrat and Republican respectively. While a previous resolution expired during the last Congress, this one seems quickly to be building a head of steam.

While many US “liberals” have argued for some time that the largest US financial groups should be broken-up, and the banking system separated, senior Republicans are now joining them, figuring that the big banks are extremely expensive if they keep needing state bail-outs.

There is a growing realization, too, that the Volcker Rule, which prevents investment banks with deposit-taking arms from trading on their own account, but allows them to trade for their clients, will be impotent, as Wall Street will simply find ever more innovative methods of disguising in-house investments. Republicans on the House Financial Services Committee and Senate Banking Committee are also floating the view that a “clean-break” Glass-Stegall separation would preferable to the regulatory over-kill represented by the voluminous Dodd-Frank law.

In addition, Elizabeth Warren has just “come out” as a Glass-Steagall supporter. Having been the inspiration behind the Consumer Financial Protection Bureau, America’s foremost consumer rights advocate, a Harvard Law Professor, was prevented from running the new organization after Obama bowed-down to his banking chums and refused to appoint her. Well, Warren responded by gaining election to the Senate and now sits on the committee responsible for bank regulation and oversight. This Glass-Steagall battle isn’t over yet, on either side of the Atlantic. Not be a long chalk. We can only hope it doesn’t take another crash to force our governments to see sense.